"ObamaCare": A Health Care Business Killer

What is the shape of the healthcare business? By next year, more than 60 percent of America’s practicing doctors will be salaried employees of hospitals or health plans.

Big health insurers like Aetna and United Healthcare are continuing to get out of the business of taking actuarial risk for the health of their members. They’re gobbling up data and technology businesses, and morphing into service providers. Their aim is to sell products like electronic health records, data, and information technology programs to the person taking all the budgetary risk in the future – Uncle Sam.

Hospitals, for their part, are going to try to turn themselves into regional health plans by consolidating local medical providers. Their aim is to one-day contract with the government to sell something akin to health insurance directly to consumers on the new state exchanges that President Obama’s healthcare law creates. Never mind that provider-owned systems were all the rage in the 1990s, only to see most go belly up because they couldn’t manage the actuarial risk or their balance sheets.

Things are different now. We are living in the Post-PPACA era. That’s short for the Patient Protection and Affordable Care Act, also known as Obamacare. Of course, the legislation doesn’t make any of these healthcare business endeavors more likely to succeed. It has merely left doctors, health plans, and hospitals with few alternatives but to try and merge and integrate their way out of their current endeavors.

Central to Obamacare is a vision that rearranging market power in the healthcare system will spring fresh business arrangements that will deliver better outcomes. A big part of this premise is the creation of “integrated delivery systems” like “accountable care organizations.” The idea is that doctors will become owned by large hospital-based health systems that can effectively cut out the insurance company middleman. The belief is that these systems will have the capital and capability to increase the coordination of medical care and improve patient outcomes.

It’s a big leap, and one with few successful precedents. Doctors, hospitals, and health plans are taking the cues anyway, and starting to consolidate into these new ventures. Not because they sense opportunity, but because they have no alternative.

Physicians face a world where their revenues have remained stagnant under Medicare, yet their medical practice costs are rising. Under these terms, selling their outpatient offices to hospitals, in exchange for a little up-front cash plus the promise of a long-term employment contract, is starting to look attractive.

Hospitals see inpatient revenue declining, and are on the hook for more post acute care under Medicare. They need to get into the more lucrative outpatient setting.

Finally, health plans are going to live under the thumb of tight regulation on their revenue (premiums) and costs (benefits they must provide). So the only way to manage their profit margin is to cheapen the product they are selling (the health insurance). In turn, the only way to cheapen the health insurance is to pay less for the medical care. That means owning the doctors, or controlling them very closely.

There’s ample evidence in the literature that physician productivity declines when doctors become owned employees rather than entrepreneurs. How then will the new marketplace that Obamacare creates deliver efficiencies is downright quizzical.

In the meantime, the healthcare industry’s urge to merge will continue, as the provisions rooted inside Obamacare unfold. The only certainty is that once these new business arrangements get formed, they will not be easily unwound.